Mid-Day Keynote Address

Steven Timms, UK Minister of State for Pensions Reform

US-UK Dialogue On Pensions
Washington DC, USA
July 20, 2005

I’m grateful to have been invited by AARP to speak today at this conference and I am delighted to be here.

Risks and Opportunities in an Ageing Society

I took up my current job following the UK General Election in May, but I have been Pensions Minister before. That was in 1999. It is interesting returning to these issues six years on. It was before the dot com crash and the fall in world stock markets – and before we had fully grasped the scale of increasing longevity. Pensions then was a much quieter topic, but today pensions reform has become one of the biggest challenges we face. Setting the right balance in sharing risk – between individuals, employers and government – is one of the key judgments we have to make.

Employers have been switching from defined benefit to defined contribution schemes. And many point to the balance sheet risk from defined benefit schemes as the decisive consideration. Optimising the allocation of risk is key to continuing the provision of long-run, sustainable pensions.

But the answer is not easy. If a large employer feels unable to bear the risk through the vehicle of a defined benefit scheme, surely an individual is even worse placed to bear that risk? Should individuals bear it to allow essential flexibility when fundamental parameters such as life expectancy change? Perhaps there could be a role for the government in managing risk – maybe through the provision of longevity bonds? Employers, individuals and Government – all are in the frame.

As the Pilgrim Fathers knew well, where there is risk, there is also opportunity. And I want to focus today on the opportunities of an ageing society.

The life expectancy of a man aged 65 in the UK has risen by three months every year for the past twenty years. For women, the increase has been three months every two years. These are wonderful developments, transforming all our prospects, and there is no sign of the trend slowing down. We need to plan, in order to make the most of them.

The perspectives of the next generation of retired people will have been shaped by very different experiences to those which have shaped today’s generation. They will be more numerous and likely to live longer. They will have lived through technological revolutions rather than World Wars. They will have had to cope with the smart card rather than the ration book. They’ll work for longer, be more independent, enjoy better health and be making very different demands of their politicians.

The challenges of an ageing population include how to organise saving to provide adequate incomes in retirement. But they go much wider. They include employment, healthcare, discrimination and access to public services. Governments will have to think much more carefully and broadly about how to meet the needs of older people: from Sports Centres to care homes; from transport to the workplace.

We need to change fundamentally the way we think about ageing. It’s increasingly about activity rather than dependency. More often today, older people give support to others, as carers and grandparents, rather than being dependent on care themselves. They need to be enables to exercise choice. We need to encourage and support them in playing an ever greater and more active role in our society. “Re-inventing Retirement” is about how our whole society is changing, and whether we can make ageing an opportunity for all of us, rather than a threat. We have to plan now for an ageing population. Muddling through will not be enough for success.

There’s no single magic solution. Each country has to find the right mix of policies. But we can explore options together, learn from each other’s experience and expertise – as we are doing at this conference – and help each other to plan actively for an ageing community.

Progress on pensioner incomes

In the UK, an important part of our reforms, helping ensure sustainability of state pension provision, has been to target new resources at the least well off pensioners, as those who need help the most. Pension Credit, introduced two years ago, offers a guarantee that every pensioner will be able to obtain a minimum level of income to avoid poverty, and above that, up to an income threshold, it rewards pensioners for having built up modest savings.

In combination with measures such as Winter Fuel Payments, and increases in the Basic State Pension, the new arrangements mean that the least well off third of pensioners are some £2,000 a year - $3,400 - better off than would have been the case if the 1997 system had been retained. The proportion of pensioners whose income after housing costs is less than 60% of the median for the population as a whole has fallen from 27% in 1997 to 20% today – and that at a time when median earnings have grown sharply through Britain’s recent economic success. Periods like the one we have enjoyed of economic success have tended in the past to be marked by a decline in the relative position of retired people, but we have been able instead to improve their relative position.

It led the Institute for Fiscal Studies in London to declare recently that, for the first time, people in retirement in the UK are now no more likely than anybody else to be poor.

But maintaining that desirable position will not be easy. The challenge of rising lifespans poses more fundamental challenges still. Our Pensions Commission, chaired by Adair Turner, will produce its final report in November, and the Government will need to respond with proposals for long term reform.

Some have suggested that we should raise the State Pension Age at which it is possible to draw a state pension on the basis of past national insurance contributions. At present the age is 65 for men in the UK and 60 for women, but the age for women will be raised step by step from 2010 until it is also 65, as for men, in 2020. We may have to consider increasing it further, although it will be hard for some, but part of the challenge that we face in the UK at the moment is to help people to work up to the current State Pension Age, let alone setting a higher one. Over a third of men in the UK are outside the labour market by the age of 60; and over half before the state pension age of 65.

Our State Pension Deferral policy increases the rewards for choosing to work for longer – introducing an enhanced state pension or a lump sum of £20,000 to £30,000 for typical individuals who decide to take their State Pension at 70 rather than 65.

And our tax simplification measures taking effect next year also mean that, for the first time, it’s possible to carry on working for the same employer whilst drawing an occupational pension.

Last November, we passed a Pensions Act that is a landmark in securing and strengthening private pension provision. The Act created the new Pension Protection Fund whose remit is comparable to the Pension Benefit Guarantee Corporation, and which is greatly strengthening protection for members of defined benefit pension schemes.

The Act will also help employers to provide pensions in the first place. It strips away layers of regulation that have built up over the years, and it complements the radical tax simplification taking effect next year which replaces today’s eight separate tax regimes with one single regime.

Another key dimension, is giving individuals the information they need to make good decisions about saving for their retirement. We need to encourage workers to take advantage of employer supported pension provision that is already available – too many, who could, are not doing so at the moment. Some 4.5 million people have access to company pension schemes in the UK but have not joined them. Where an employer makes a contribution to the scheme, these individuals are missing out on a significant employee benefit.

If we could put that right, we would go a long way towards addressing the current problem of under-saving for retirement. So we have been examining options such as auto-enrolment – where employees are included unless they opt out, rather than being excluded unless they opt in. I know this has been very successful in the US - with evidence suggesting that it can double participation rates – and I’m very keen to explore this further in the UK. We published guidance last week to encourage employers to practice auto-enrolment and to address the anxieties they have about it.

Empowering Older People in the Workplace

A key element of the response to longer lives must be making it easier for people to choose to work longer. Older people are a valuable part of the labour force, and yet many retire early because they are compelled to stop work rather than because they want to. Avoiding the cliff edge between work and retirement must be a Government priority, together with breaking down the wasteful barriers – often self imposed – which prevent employers from accessing the skills and talents of older workers.

One barrier that can stop older people working longer is discrimination on the grounds of age. We gave details last week of the legislation we propose to address age discrimination in employment from next year.

Can it be right that people can lose their jobs for being 65? It does not seem right. But mandatory retirement ages can be a management tool for companies – so we need to tread carefully in changing the rules. There were calls for us to abolish mandatory retirement ages altogether, but we have announced that, instead of that, from next year, mandatory retirement ages below age 65 will be unlawful unless, exceptionally, a lower age can be objectively justified. And employers will have to give consideration to requests from employees reaching retirement age to work on.

Age-related discrimination is not the only problem. Older women face serious problems with pensions and employment which add a gender dimension to the challenges. Our culture needs to change, to break down these barriers and enable individuals to realise their ambitions of entering and staying in work, and to give better opportunities to older workers.

We can’t afford to allow discrimination to deprive the economy of the skills of an entire cohort which could contribute to the pool of labour available to meet the growing challenges of an ageing population.

Promoting independence

But the challenge goes much further than simply achieving adequate incomes for retirement. We recently published Opportunity Age, our cross Government strategy on ageing, which highlights the importance of independence and dignity. It recognises that the ageing of our population demands new kinds of collaboration from agencies within Government and across society as a whole. We need to work more effectively together.

The provision of care for those who need it is an important topic. In the past in the UK, there have been a variety of sources of help for people requiring help – financial help, and services provided through local authorities and others. We want to explore instead giving the person who needs the care the funding which is providing the care, and let them decide how to spend it to meet their needs best. We shall be piloting these individual budgets for care from later this year.

At the heart of our strategy is the conviction that the later decades of life should be as fulfilling as the earlier ones. That retirement should be invigorating and fulfilling rather than a period of decline and isolation. It means prolonging good health by keeping mentally and physically fit in retirement.

It’s about more than just health. We must think about meeting the growing demand of older people for leisure services and transport. And we need to tackle the fear of isolation by encouraging and supporting older people to contribute to the wider local community. Only a quarter of over-60s in the UK feel that they can influence local decisions.

The proportion of older people who live alone is likely to increase in the next 20 years. Tackling a sense of exclusion is crucial if we want to bring about real cultural and social change. We need to encourage and help older people to build networks of support and interest – for example, through social clubs and activities.

Partnership across Government and at Local/Community levels

Delivering these changes means working in effective partnerships across different Government departments, and outside Government with the private sector and community organisations, and at local and community levels.

Our aim is that the engagement of older people will now be a key part of the system of Comprehensive Performance Assessment for local authorities which is operated by the Audit Commission. Nationally, Government departments must join up to deliver an ever greater collective package, closely examining, for example, how science and technology or sport and culture are meeting older people’s needs.

Conclusion

So we are confident that, by acting now, we can plan successfully to make the most of the opportunities of an ageing population. Governments must show leadership, and have the courage to convey difficult messages, and to act to ensure that they shape the cultural and social changes which can allow our society to maximise the gains from what is unquestionably one of the greatest advances of our time – namely that we can all look forward to longer lives. Given the right planning, we can look forward also with confidence to ageing actively. I hope we can work together to maximise the chances of our succeeding,

Thank you.